The recent ongoing conflict between the nominated directors and the management of the Karachi Stock Exchange has been a source of concern for many, who had been advocating for implementing a strict code of corporate governance in corporate sector.
The proceedings of the last meeting of the Board of Directors revealed several weaknesses and excesses of the nominated directors that need to be highlighted, if we wish to enforce strict code of corporate governance at all levels irrespective be it a government controlled entity or a private sector institution.
The Managing Director of KSE revealed that it was difficult to implement good practices of corporate governance in one of the leading bourses of the country, where SECP has made exceptions to the rule and allowed the chairman of the KSE Board to establish his own office in the building, have his own secretariat there and enjoy a remuneration and perquisites. This was a clear deviation from the past practices.
This change has converted this non-executive position into an executive position of Chairman that is not only contrary to good practices but also gives an impression that it is an effort to undermine the legitimate authority of the KSE Managing Director who should be responsible for day to day management of the exchange and should act as a front line regulator.
Under the present case, it is arguable, if that objective could be achieved. It is interesting to observe, that SECP disallowed Chairman's office including his perquisites earlier through a directive issued in 1995 when the Chairman was elected from amongst the KSE members. It is being alleged by the stakeholders that this decision is a financial burden on the KSE. It is also being argued that as these special favours are being accorded to the present chairman of the Board of KSE only and has not been extended to other two bourses, its legitimacy is questionable.
This also raises doubts in the minds of the stakeholders that under these circumstances, if the Chairman of KSE Board, as a director, would remain truly as an independent director and would not be influenced by the direction of SECP's Chairman.
Looking at the stature and the past experience of the Chairman of KSE board, it would have been more honourable if he would have denied these rewards for this office for the sake of transparency, honesty and independence of the office. His position should be compared with that of the Chairman of the Lahore Stock Exchange, who has even foregone to receive directors fees for attending Board meetings, what to talk about receiving special remuneration for Chairman's services.
The Chairman's LSE Board's decision prompted other directors of LSE to forego their director's fees also. These gestures are well received by the investor's community and show independence of the office of a director, be it nominated or elected.
Regarding the appointments of the nominated directors, it has been discussed in electronic and print media several times in the past that SECP has not been able to devise transparent criteria to appoint the nominated directors. The appointments have been made purely on the personal relationship of the individual with the SECP. The way these appointments are made, gives an impression that this is somehow a via media to bestow rewards and favours to friends and known personalities irrespective of their capability or capacity to perform on these positions.
The present directors are highly placed in corporate sectors and there is hardly any question of their capability to serve on KSE Board, but the important issue under discussion is that do they have enough time to devote to an assignment that is non-executive whereas they are busy in performing their executive functions elsewhere. This is evident from the proceedings of the last KSE board meeting, where the KSE managing director has alleged that most of the nominated directors leave the board proceedings half way through the meetings and that out of the last fourteen meetings, average attendance has not been more than five, including the Chairman himself.
He also said that one of the nominated board directors has handed over his proxies to the Chairman of the Board to use as he pleases because he would not be attending future Board's meetings. This act is not only illegal but also ridicules the functioning of the Board. This is a classic example of the unprofessional conduct of not only the director who has handed over his proxies but also shows the attitude of the Chairman of the present Board towards the good practices. SECP should have acted promptly on this and should have removed the said director from the Board.
As the nominated directors are well placed in industrial and corporate sectors, it would have been much appreciated if they would have themselves resigned due to their previous commitments and should have paved way for those who are willing to devote time and work for the betterment of this institution.
It is a pity that we have a Board of one of the largest bourses of the country that is neither capable in its affairs nor interested to devote time to monitor its policies, practices and devise the strategic plans for its future stability. The performance of the Board as a whole may be measured with several instances of market crashes and manipulative activities and the Board has never shown any public interest to be vigilant or to take corrective actions.
Originally, it was thought that the nominated directors would be taken from professional institutes, Universities and other eminent personalities who have either expertise or are willing to devote their time for strengthening the bourses within the country. That hope has faded away and appointments were made on likes and dislikes.
The Managing Director of KSE should be complimented for identifying these weaknesses boldly so that in future the SECP or the government should pay adequate attention to this aspect of the Boards appointments.
Recently, the SECP has permitted the directors of all the three bourses to undertake trading transaction of shares on their behalf. Most of the stake holders were skeptical regarding this decision. This is a clear case of conflict of interest. This is neither allowed in private or public sector. This is a violation of the grossest nature. By allowing the directors to undertake their trading transactions, the SECP has accepted that insider trading is no bar at the Pakistani bourses and that is certainly not a healthy signal we are giving to foreign investors.
The Stock exchanges performance in Pakistan has been mentioned several times by the government as an indicator showing the economic progress of our country. How we will be able to maintain this performance, if there is no bar to insiders trading and even the directors sitting at the very board where some of the sensitive decisions are being made have been allowed to participate in the trading of shares. How the stakeholders or other small to medium size investors would be assured that the directors having their personal interests in mind would act without being biased?
This was the only reason when SECP decided to nominate its own directors and the Chairman from outside the member's community that those sitting in the very board where these decisions are being made would result in conflict of interest if the same directors are involved in trading of shares.
Now, if this restriction has been withdrawn, SECP does not have any legal or moral ground to force the stock exchange member's community not to press for its own Chairman and the entire directorship. Presumably, SECP has a weak position on this issue.
By allowing the trading of shares to the directors, we are negating the concept of inside trading and that would be certainly damaging for the investment markets in future. In case, this permission is withdrawn by SECP, all those directors that are interested in trading of shares should voluntarily opt for their resignation and let us have those directors who are not willing to trade as insiders.
It is interesting to observe also that SECP has reversed its earlier decision on this ban. It is being argued that the reversal of the decision was also to accommodate or favour some of the nominated directors. This is very sensitive issue and the SECP must give a second thought to this permission and should remain consistent in its decision making process.
By converting the non-executive chairman into an executive chairman, SEC has reversed the reform process of the stock exchanges for reasons unknown to the most of the stakeholders.
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